Home / Deeper Thought / Franklin Templeton analyses the rising corporate and household debt wave

In our Deep Water Waves publication, we identified several powerful, connected and long-duration factors that will have a significant impact on investment returns over the next decades. One of these is the debt wave, driven primarily by a combination of economic, geopolitical and demographic pressures.

We observe that the debt wave is at a historic peak in terms of the US dollar value of the debt in issue and appears set to continue growing. This was sustainable with low inflation and plentiful liquidity. These factors have both reversed, leading to a heightened urgency to raise capital. As a result, the traditional view on “fiscal responsibility” seems to have moved from the mainstream of political and economic policy debate to the fringes. Given several secular trends in place, this “wave” is apt to grow in depth and breadth. This process drives an increasingly structural polarization between those countries that can easily continue to issue debt and refinance and those that cannot. This paper focuses on household and corporate debt, assessing the “quality” of investments and the implications of high inflation and high interest rates on investment risk and returns.